ETF Teardown: The Best Wireless Stocks

CAPS helps us identify the market's best wireless leaders.

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool. ETFs hold a collection of stocks that share certain elements in common, so if investors want to capitalize on the rapid proliferation of wireless technologies around the world, for example, they can turn to Wireless HOLDRs, which holds significant stakes in wireless giants such as Research In Motion (NASDAQ:RIMM) and Verizon Communications (NYSE:VZ).

But since this ETF invests in a number of stocks, it gives investors a broad diversity that also limits your upside. For an investor who was, say, really hip to wireless chipmakers but cold on wireless-device manufacturers, this ETF wouldn't fit the bill.

Fear not, Fool -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best of what the wireless sector has to offer. To help, we'll use Motley Fool CAPS, our tool for screening and ranking stocks and stock pickers.

The power of tags To help investors quickly locate great stocks, any of the 5,000 rated stocks that are profiled in CAPS can be "tagged" with a descriptor that groups the company with others sharing a certain quality.

Selecting the "Wireless Communications" tag in CAPS presents a list of 80 wireless investments that trade on American exchanges. This particular collection of investments has done very well in the past year, up 33% versus a gain of 15.9% from the S&P.

To gauge which companies the CAPS community considers today's best wireless opportunities, we can sort this list by CAPS star rank, from a lowly one star to the highest five-star rating. We can then examine each company to see exactly who -- from Wall Street to Main Street -- is bullish or bearish on the company, and why.

Getting down to the nitty-grittyHere's a sampling of some five-star wireless stocks our screen pulled up today.

Company

CAPS Rank

Atheros Communications (NASDAQ:ATHR)

*****

America Movil (NYSE:AMX)

*****

VimpelCom (NASDAQ:VIP)

*****

China Mobile (NYSE:CHL)

*****

NTELOS

*****

No doubt about it -- the wireless-communications sector is hot again. But much of the recent charge in wireless stocks comes from international operators that are tapping emerging markets. America Movil, VimpelCom, and China Mobile are all seeing revenue surge quarter after quarter by attracting millions of subscribers in underdeveloped and prospering regions.

But while many investors considered international wireless stocks a no-brainer before they shot up, the high valuations in many of the companies today places more risk -- and less potential reward -- in shares of giants such as China Mobile. While the leading Chinese wireless operator has solid fundamentals and dwarfs China Unicom (NYSE:CHU), its only competition in China, its forward earnings multiple of 32 means that its expected 21% future growth is already more than priced into the stock. CAPS investors still show high favor for China Mobile, though, with 968 of the 977 All-Star investors who rated the company in CAPS believing the company will beat the S&P going forward.

Another company that focuses on a more specific niche and carries a less pricey valuation is Motley Fool Hidden Gems recommendation Atheros Communications. The maker of wireless communications chips for local area networks is up nearly 25% this year, but shares dropped like a rock in July after the company issued guidance that didn't live up to analysts' expectations. The company is diversifying its product lineup, however, and is still expected to show solid earnings growth of more than 23%.

CAPS investors are overwhelmingly bullish on Atheros as well, with more than 98% of investors who have rated the company making a bullish call. The strong base of large customers such as Apple and IBM, as well as Atheros' expertise in next-generation networking chips, are some of the reasons our CAPS investors cite.

You can lead a horse to water ...Plucking individual stocks from a diverse sector such as wireless communications is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than take a recommendation. After all, even the best stock pickers can be horribly wrong on a stock.

So, do you agree that international wireless companies are the best places to invest? Or are wireless chip makers a better play? Give your own opinion in Motley Fool CAPS.